German policy shifts too slow for some, too fast for others

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Good morning and welcome to Europe Express.

I’m back in Brussels after a trip to Berlin, where the foreign minister of Ukraine, Dmytro Kuleba, visited yesterday, in the latest sign of thawing relations between the two countries after a rocky start (including Germany’s president being snubbed by Kyiv).

Germany has since approved the export of heavy weaponry to Ukraine. It has given a green light to EU embargoes on Russian coal and oil, and it now seeks to become independent of Russian gas by May next year.

These policy shifts in the German capital are deemed too timid by some (notably, by Ukraine’s vocal ambassador), and too rapid for others who want to hold on to the ways of the past. Here are some of the highlights and what can be expected from Germany in the short and medium term.

  • Lifting Russia sanctions: The view in Berlin is that sanctions should not be lifted if there’s just a ceasefire and Russia gets to keep the territories it has conquered. Only a peace accord that is acceptable to Ukraine, which would guarantee its sovereignty, including a professional and modern army, could lead to the lifting of sanctions. In any case, Berlin says it will not press Kyiv into accepting a deal.

  • Oil embargo: Germany dropped its opposition to the oil embargo after it managed to secure alternative supplies for its two refineries built for Russian oil. Officials say that the delays in adopting the sixth EU sanctions package are understandable, given that some central European countries are fully dependent on Russian oil and it does take time to adapt their infrastructure to non-Russian oil. But Berlin would take issue with countries being exempt for a few years from implementing the oil embargo only to continue trading with Russia without planning to change anything.

  • EU membership for Ukraine: There is support for starting the process for Ukraine, but also a strong focus on sticking to the same rules and procedures that have bound every other country seeking to join in recent decades. Berlin is very keen on accelerating the accession process of western Balkan countries. Some officials toyed with the idea of an intermediate stage for Ukraine, perhaps “associate membership”, which could be granted quickly while keeping the promise of full membership alive. That could somewhat match Emmanuel Macron’s ideas for a new political architecture, but Berlin awaits more details of what France’s president actually means by that.

  • Sweden/Finland: The two Nordic countries can count on German security guarantees in the period between applying to join Nato and actually becoming members.

  • EU treaty change: Appetite for more treaty change is low, not least because there is a firm belief that switching the decision-making process in the European Council from unanimity to majority voting in key policy areas can be achieved without changing the treaties.

  • Fiscal rules: Berlin would not object to another year-long exemption from the bloc’s fiscal rules in 2023, as long as there’s a path to return to the bloc’s deficit-and-debt rules in 2024. There is certainly sympathy for southern eurozone economies and their needs coming out of the pandemic and faced with the new headwinds from inflation and the war in Ukraine. Unlike in the wake of the financial crisis of 2008-2009, the current German government is not insisting on austerity measures.

  • Joint gas purchasing: This is very complicated to achieve because of existing market and contractual obligations. There is also a question as to what the European Commission wants to achieve here: reduce Vladimir Putin’s revenues, lower Europe gas prices at the pump, increase negotiation power when dealing with LNG suppliers like Qatar, foster green energy transition? There isn’t a common view yet as to which of these goals should be pursued.

  • Recovery plan 2.0: There is no support for any plans about a new round of EU joint borrowing

  • Rule of law: Some EU diplomats wonder if Hungary is refusing to endorse the sixth sanctions package because it wants the commission to cast aside rule of law concerns and wave through its bid for the EU’s recovery fund. But Hungary cannot expect easy concessions on the rule of law. Talks with Poland, meanwhile, on its recovery fund application are almost there, but there is a lingering trust issue — will they actually deliver on what they said they would?

Chart du jour: Bond retreat

Line chart of Euro corporate index (total returns) showing European high-grade corporate bonds in historic pullback

Read more here about why bonds issued by highly rated companies in the eurozone have lost investors more than 10 per cent since the peak nine months ago, marking by far the biggest decline since at least 2000.

Nordic moments

Yesterday marked a historic moment for Finland as the Nordic country’s president and prime minister came out firmly in favour of Nato membership, but there are a few more historic days ahead, writes Richard Milne, Nordic and Baltic Correspondent.

Finland and neighbouring Sweden are likely to file formal applications to join Nato by the middle of next week. But there are still some hurdles, formal and otherwise, to overcome beforehand.

First up, later today, is a cross-party report in Sweden on security matters including Nato. A majority in Sweden’s parliament already backs Nato membership but the report, and particularly Finland’s own positive decision, are likely to weigh heavily with the biggest current holdouts, the ruling Social Democrats.

They will make their own position known on Sunday, one day after their Finnish counterparts, also in power in Helsinki. Everything points to a yes in both cases, but the Swedish one will be slightly more reluctant as a party whose identity is to a large extent built on 200 years of non-alignment and not fighting a war moves to enter the western defence alliance.

Things get particularly serious in Finland on Sunday when the president and the ministerial committee on foreign and security policy are expected to make the formal decision to apply. Parliament would debate and vote on that, probably on Monday.

In Sweden, the government is set to meet on Monday and decide on an application to join. Both countries would need to decide on the final step: sending the formal application to Nato.

One opportunity could be the state visit on Tuesday and Wednesday of Finland’s president Sauli Niinistö to Stockholm.

All that would follow then is a rapid approval of their applications by Nato — expected to take a maximum of two weeks — and then the rather lengthier process of ratifying their membership requests by the 30 current Nato members. If all goes well, some time this autumn or winter Finland and Sweden could become the 31st and 32nd members.

Mushrooming partnerships

The EU likes nothing better than inventing new forms of partnership. The trade and technology council is the latest, writes Andy Bounds in Brussels. A dialogue with the US began last year and the two sides meet again in Paris on Sunday and Monday.

Only last month Ursula von der Leyen, commission president, surprised many member states when she offered a similar framework to India on a visit. Details remain sketchy.

Now the EU and Japan have set up a digital partnership to advance co-operation on tech issues and to help ensure a successful digital transformation that delivers solidarity, prosperity and sustainability.

“The launch of our digital partnership today is a milestone. In fact, it’s our first digital partnership with any country,” said Charles Michel, president of the European Council, suggesting that there will be more.

It will align standards and help co-operation in several areas:

  • secure 5G and 6G technologies

  • safe and ethical artificial intelligence applications

  • the resilience of global supply chains in the semiconductor industry

  • green data infrastructures

  • the development of digital skills for workers

The partnerships have a similar aim: aligning regulations to ensure that global rules are not shaped by China, and to help each other build supply chains that are not dependent on the country.

China remains the EU’s most important trading partner but relations have soured since its embargo on Lithuanian goods imposed late last year and Beijing’s embrace of a “no limits” partnership with Russia.

The EU also supported Japan in its naval rivalry with Beijing, saying that they “strongly oppose unilateral attempts to change the status quo and increase tensions”, also in the waters surrounding the Senkaku Islands (which Beijing claims and calls the Diaoyu) and in the South China Sea.

The two sides discussed human rights abuses in China and its threats to Taiwan. The EU and Japan will deepen their exchanges on China, notably with regard to political, economic and security dynamics, including on the situation in Hong Kong as well as on human rights, including in Xinjiang.

“The EU wants to take a more active role in the Indo-Pacific. We want to take more responsibility in a region that is so vital to our prosperity,” said von der Leyen.

What to watch today

  1. G7 foreign affairs ministers meet in Weissenhaus, Germany, while G7 agriculture ministers gather in Stuttgart

  2. European Council president Charles Michel visits Hiroshima

Smart reads

  • China link: Europe’s green ambitions and its desire to be more autonomous when it comes to supply chains are two somewhat contradictory goals, as China remains an important player in green technologies, writes the European Council on Foreign Relations. This has the potential to create European overdependence on China-based supply chains and decisions made in Beijing.

  • Young anxiety: Nearly two-thirds of young people in Europe fear that the conflict could spread within the EU, according to a survey carried out among more than 7,000 people between the age of 16 and 38 in France, Germany, Italy, Poland, Romania, Spain, and the UK.

  • Case for Moldova: As the war wages in Ukraine, Moldova is next at risk on account of political, economic and security vulnerabilities, writes the Centre for European Policy Studies. In this analysis of Moldova’s application to join the EU, CEPS argues for a decision to extend candidate status to Moldova.

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